ECONOMIC UPDATE: JULY 2017
According to this Economic Update, the spread between BDC and I&E window rates narrowed from 4% in April to 0.1% in July 2 save for the official rate.
FMDQ ignites further FX liquidity flame:
In more recent development, the FMDQ selected Bloomberg as a partner saddled with the responsibility to report transactions in the I&E window electronically and enhance price discovery and transparency. Consequently, Bloomberg’s USDNGN reporting became based on the I&E window as opposed to the CBN-determined SMIS interbank rate. In our view, the increase in FX turnover at the I&E window and an overall improvement in liquidity level guided the decision. We also think the move was effected to fast-track the synchronization of FX rates in Nigeria. This, in our view, should boost investor confidence in Nigeria’s currency markets in the near term and, by extension, bolster portfolio flows into naira assets as well as leave the I&E window relatively greased with dollar supply.
Transport inflation to bow to lower diesel prices:
In June, headline inflation moderated 15bps from prior month’s reading to 16.1% YoY following temperance in core inflation which more than offset extended pressures on food inflation. Going forward, the more robust cut in diesel prices effected by the NNPC in late June should positively impact the HWEGF division as well as stoke moderation in transport inflation in the coming reading. Thus, we project sustained downtrend in core inflation. Similarly, a strong correlation between transport prices and food inflation speaks to softer food price growth farther out. Overall, impact of our expectations for the duo should sustain the currently moderating inflation trajectory in the coming months with headline reading expected to print at 15.8% YoY in July.
CBN goes tough on banks to extend tightening drive:
The naira yield curve contracted at the fastest pace since the turn of the year in July, largely reflecting yield downtrend at the short end of the curve. In our view, the decline in T-Bill yields reflected increased purchase of bills by banks following sustained issuance of stabilization securities which raised the opportunity cost of sitting on excess liquidity. The CBN, faced with increases in market liquidity, forced debited banks to the tune of N471 billion via stabilization securities in June—with 61% of the issuance occurring on the 29th of June and at below market rate of 16%.
July PMI: Tentative signs of an economic recovery:
PMI sustained its expansionary trend in July, with manufacturing and non-manufacturing readings printing at 54.1 and 54.4 points respectively. Although the PMI is not always a seamless guide, sustained improvements in its reading provide some support to expectations of imminent economic recovery. Given the optimistic outlook for business at the start of the H2 17, which was largely hinged on improved dollar liquidity and higher prices, we see scope for further improvements in manufacturing and services GDP growths in Q3 17. Juxtaposing the mentioned with expectations of higher oil production and sustained CBN support to the agricultural sector, we now forecast GDP growth of 0.4% YoY in the third quarter of 2017.